By Kevin Grell PhD, Crowdfunding Beat Sr. Guest Editor,
The Minimum Run… and the Long Stretch
Millions of entrepreneurs seek crowdfunding each year; the industry is booming and regulators prepare for investment-based (“JOBS Act”, Title III) crowdfunding in 2015. Twin Peaking Crowdfunding discusses what entrepreneurs can expect from their campaigns in terms of funding volumes, but what does it actually mean for day-to-day operations to have the crowd on board… and waiting? Throughout 2013/2014, the brothers Brent and Eldrick Garcia ran several successful crowdfunding campaigns for their company, Out Tek, LLC, and they are right now in the process of finetuning product development tactics in the year to come. I have had a chat with Eldrick (left) about their experiences with crowdfunding and development plans for 2015.
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“Crowdfunders know what they want!”
Out Tek exemplifies a new trend for startups in the crowdfunding space: The crowd is sourced for feedback, contributions, as well as ideation, before traditional market research. This crowd-first approach drastically innovates B2C entrepreneurship. Out Tek operates out of Southern California and Nevada. The main products, the “Fish Bone”, the “Snapper”, and the “Piranha”, are examples of knotless gear ties for “people on the go!” As many other small consumer facing companies, Out Tek’s main sales channel is their own website,fishbonefish.com.
The company can ship their products globally, but the big challenge is of course to create awareness of their products without burning through advertising-dollars. Five crowdfunding campaigns have to some extent enabled Out Tek to reach target customers, but more importantly, they have helped the company streamline product development and customer service from day-one. Compared to customers from Out Tek’s web store, crowdfunders stand out in three ways.
According to Eldrick Garcia, 85-90% of the customers from their crowdfunding campaigns are more interested in being part of the process than necessarily getting their products on time.
The same group can easily be sourced for information; insights ranging from product design and packaging, to distribution and market development, can be sourced directly from the customer base. This is not the case for customers on the website.
When customers engage it is no surprise that it presents a challenge for customer relations (or CRM). For a small company, this can be challenging. Normally, Out Tek receives 10-15 customer inquiries per week; during a crowdfunding campaign this number easily triples (about 45-50 per week) while a campaign is live; and dobbles (about 20-30 per week) in the month after the campaign. For the most part these inquiries are positive and collaborative, but they still present a CRM challenge, and one solution that may be rolled out during 2015 is to direct these inquiries to a social platform.
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Via crowdfunding campaigns, audiences of 500-3000 were reached with very little marketing effort. Social sharing combined with tit-for-tat favors with similar campaign owners on Kickstarter.com lead to an 80% funding success. Twin Peaking Crowdfunding discusses why companies such as Out Tek have to be very careful not to set funding goals too low. Brent and Eldrick follow the minimum-run principle where the funding goal is set such that sales revenues exactly trade off setup costs and costs of materials and distribution. This is not necessarily the profit maximizing strategy to follow, but the goal here is to build market traction… not milking an opportunity.
By setting funding goals as low as $1000, Out Tek enhances the chance of getting products into the marketplace. “Even our manufacturer is willing to share some of the risk” Eldrick explains, “I’m not 100% sure that he would be turning much of a profit if we came back with a $1000 order, but he believes in our projects, and is willing to support us at this early stage.”
“My brother could run a Kickstarter campaign every month!” Eldrick shares while laughing, “My challenge right now is to build a company around his creative talent.” Eldrick and Brent are both 100% aligned with their target customers. Loves hiking, camping, trekking… anything outdoors. For this reason, engaging with the crowd on product ideas comes very natural.
“We will continue to present product ideas to the crowd throughout 2015, and gradually build out as we learn what our customers want.” Eldrick says. When entrepreneurs like Brent and Eldrick garner support and builds market traction, it is not only because of their products. THEY are themselves vetted! This is one of the attributes of crowdfunding that money cannot buy… a social network built around the entrepreneurs themselves.
Who should own Out Tek?
According to the SEC’s own schedule, Title III of the Jumpstart Our Business Startups (“JOBS”) Act, will be effective by the end of 2015. What this basically means is that a company like Out Tek could sell securities to their customers… the crowd.
But should they? And are they interested in that? For Out Tek, it isn’t clear yet whether equity crowdfunding will be part of their 2015 venture.
“It would give people who are excited about our projects an opportunity to actually help build a solid business that they believe in.” Eldrick says, and continues, “For companies who will use this mechanism, it definitely means that they get to take their pledges to a whole new level. Their investors will be the most passionate and driven people who can really advance the business and create amazing products.”
However, the challenge is to find the crowdfunders who actually share in on the vision, and are not just looking to make a quick buck. Eldrick wraps it up like this: “There will be some people who are just looking to “get rich quick”. Worse, they won’t have that “crowdfunding spirit” and will not understand or care about the nature of crowdfunding… expecting more of a “Wall Street” experience. These people could potentially destroy the soul of Crowdfunding… Going along the lines of “selling out” or becoming too mainstream.”
The JOBS Act was signed into law on April 5, 2012, and the part of the bill that involves crowdfunding (Title III) should be implemented by October 2015.
This article also published on Wired.com on December 31, 2014